Retirement Heist: how companies plunder and profit from the nest eggs of American workers

Another clever way to pass the discrimination tests is by providing matching contributions. A common scenario is that an employer will chip in fifty cents for every dollar an employee contributes to his 401(k), up to 6 percent of pay. An employee making $50,000 who contributes 6 percent of pay ($3,000) to his 401(k) will get a matching contribution from his employer of $1,500.

Employers say they provide matching contributions to encourage lower-paid and younger employees to participate. That’s true, but a bit disingenuous. If that were the whole story, the contributions would be the employees’ to keep. In reality, lower-paid workers commonly forfeit the employer contribution, because of lengthy vesting requirements, which used to be as long as ten years but now are three years for savings plans and three to five years for pensions.

A company with high turnover can afford to provide a more generous match, since ultimately it won’t pay it all out. Employers use the forfeited matching contributions to make future contributions, which reduces their costs. A 2 percent match will cost only 1 to 1.5 percent, because of forfeitures.

When employees forfeit the employer contributions, they also forfeit the earnings on those amounts. This means that the employer not only gets its contribution back; it also receives tax-free earnings on the money.

The vesting period can be stretched out in other ways. Some plans have required employees to be employed on the fifth anniversary of the day they were hired in order to vest, or on the last day of the fifth year. Wal-Mart employees must work for 1,000 hours in a consecutive twelve-month period to be eligible to participate in the profit-sharing plan. In 2009, 79,339 employees forfeited some of their benefit when they left.

The company then redistributed the money to the remaining employees “based on eligible wages,” meaning that some company contributions originally destined to aid lower-paid employees ended up benefiting longer-service, higher-paid employees.

Employers are perennially seeking to loosen the discrimination rules even further. They scored a big coup with Automatic Enrollment, a provision in the Pension Protection Act that became effective in 2007. This was touted as a way to improve participation. The theory is that poor participation rates are the result of worker apathy and that if they are automatically enrolled, it would solve that problem. It’s hard to see how it will help improve savings rates: Employees can drop out at any time, and they aren’t forced to contribute. At Wal-Mart, 8 percent of the employees who are considered participants in the retirement plan have nothing in their accounts.

What the new rules do, however, is give employers a free pass from the discrimination rules: As long as a plan merely offers automatic enrollment, employers don’t have to worry about passing discrimination tests.

CHAPTER 9

Project Sunshine: A HUMAN RESOURCES PLOT TO DISSOLVE RETIREE BENEFITS

AT AGE NINETY-TWO, John Wesley Galloway had beaten the actuarial odds for someone who’d spent a lifetime in hard labor in an iron foundry. For thirty years, he’d churned out parts for Kelsey-Hayes, the Rockford, Illinois, unit of a Midwestern farm equipment maker. Galloway had also beaten even more impressive odds: He’d survived more than two decades with his retiree health coverage largely intact, despite the relentless efforts of his former employer—and the current owner of the retiree portfolio he’s part of—to take it away. The company and its successors had used almost every trick in the book: legal maneuvers, illegal maneuvers, restructuring games, and deceit. Despite myriad attempts to whittle down the coverage for Galloway and his wife, Pansy, it was still intact.

But in 2006, and again in 2008, the plan administrator came up with a new trip wire. It sent Galloway a letter telling him that his health coverage would be canceled unless he could prove he wasn’t dead. If the company didn’t receive a notarized affidavit attesting to his continued presence on earth, the company, TRW, would cancel this coverage. Galloway had heard about IRS audits, but not death audits. This is just one of the many cost-saving maneuvers consultants have dreamed up in recent years to help their clients reduce the cost of their retiree health plans. Over the past twenty years, Galloway had just about seen it all. And there was more to come.